Payroll Schemes

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Chapter 6

• Payroll Schemes

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Payroll Schemes
Ghost Employees
Commission Schemes
Workers Compensation
Falsified Wages
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Frequency of Fraudulent Disbursements
Payroll
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Median Loss of Fraudulent Disbursements
Payroll
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Dollar Loss Payroll Schemes
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Detection of Payroll Schemes
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Perpetrators of Payroll Schemes
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Median Loss by Perpetrators Position
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Payroll Schemes by Number of Employees
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Size of Victims Payroll Schemes
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Payroll Schemes

• Occupational frauds in which a person who works
  for an organization causes that organization to
  issue a payment by making false claims for
  compensation
• Ghost employee schemes
• Falsified hours and salary schemes
• Commission schemes

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Ghost Employees

• Someone on the payroll who does not actually work
  for the victim company
• Fictitious person
• Friend or relative
• Accomplice

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Ghost Employee Schemes

• Adding the ghost to the payroll
• Through the personnel department
• Through the hiring department
• Through the payroll department
• Using names similar to real employees
• Failing to take terminated employees off the
  payroll

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Ghost Employee Schemes

• Collecting timekeeping information
• Fake timecards
• Approval of timecards
• Computerized timekeeping systems
• Salaried workers vs. hourly workers

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Ghost Employee Schemes

• Issuing the ghosts paycheck
• Delivery of the paycheck
• Hand delivered
• Mailed to the employees address
• Direct deposited

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Preventing and Detecting Ghost Employee Schemes

• Separate the hiring function from the payroll
  function
• Personnel records should be independently
  maintained from payroll and timekeeping functions
• Personnel department should verify any changes to
  payroll
• Background and reference checks should be made in
  advance of hire

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Preventing and Detecting Ghost Employee Schemes

• Periodically run computer reports for employees
• Without SSNs,
• With no deductions - withholding taxes or
  insurance
• With no physical address or telephone number
• Compare payroll expenses to production schedules
• Keep signed checks in a secure location
• Payroll checks should not be distributed by
  someone with hiring authority
• Verify proper distribution and require employee
  identification
• Any dual endorsements of cancelled checks should
  be viewed with skepticism

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Falsified Hours and Salary

• Overpayment of wages is the most common form of
  misappropriating payroll funds
• Increase number of hours or hourly rate of pay

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Manually Prepared Timecards

• Forging a supervisors signature
• Collusion with a supervisor
• Rubber stamp supervisors
• Poor custody procedures

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Other Schemes

• Time clocks and other automated timekeeping
  systems
• Employee has someone else clock in for him when
  absent
• Rates of pay

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Example Falsified Hours

• Jen falsely claimed an average of 10 hours of
  overtime per week. She approved her own time
  cards and forwarded them to the payroll
  department. Jen was caught when payroll noticed
  that she had claimed overtime in a period where
  no overtime was allowed.

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Preventing and Detecting Falsified Hours and
Salary Schemes

• Preparation, authorization, distribution, and
  reconciliation should be segregated
• Transfers of funds from general accounts to
  payroll accounts should be handled independently
• No overtime paid unless authorized in advance
• Sick leave and vacation time should not be
  granted without supervisory review and monitored
  for excessive time taken

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Preventing and Detecting Falsified Hours and
Salary Schemes

• A designated official should verify all wage rate
  changes
• Timecards should be taken directly to the payroll
  department after approval
• Monitor fluctuations in payroll expense

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Tests for Fraudulent Payroll Activity

• Run programs to actively seek out fraudulent
  payroll activity
• Review employees who have significantly more
  overtime than similar employees
• Trend analysis of budgeted vs. actual expenses
• Exception reports for employees who have had
  disproportionately large increases in wages
• Verify payroll taxes equal federal return tax
  forms
• Compare net payroll-to-payroll checks issued

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Commission Schemes

• Pay is based on an employees output rather than
  hours worked or a set salary
• Falsify the amount of sales made
• Creation a fictitious sale
• Overstate legitimate sales
• Claim a sale made by someone else as your own
• Fraudulently increase the rate of commission

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Detecting Commission Schemes

• Run periodic reports to show an unusual
  relationship between sales figures and commission
  figures
• Run reports that compare commissions earned among
  salespersons
• Track uncollected sales generated by each
  salesperson
• Conduct random samples of customers to verify
  that the customer exists